Problem 7-16. Bond valuation You are considering a 25-year, $1,000 par value bon

Question

Problem 7-16. Bond valuation
You are considering a 25-year, $1,000 par value bond. Its coupon rate is 10%, and interest is paid semiannually. If you require an "effective" annual interest rate (not a nominal rate) of 7.06%, then how much should you be willing to pay for the bond? Round your answer to two decimal places.
__________

Last year, Joan purchased a $1,000 face value corporate bond with an 9% annual coupon rate and a 25-year maturity. At the time of the purchase, it had an expected yield to maturity of 12.85%. If Joan sold the bond today for $1,151.61 what rate of return would she have earned for the past year? Round your answer to two decimal places.
_________%

Explanation / Answer

a)Semiannual coupon rate = 10%*$1,000/2 = 50 Semiannual interest rate = 7.06%/2= 3.530% Price = 50/(1+3.530%) + 50/(1+3.530%)^2..... 1050/(1+3.530%)^50 Price = $1,342.94

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